Q3 2019 Earnings Call
Well the Vivek Conference Center next available conference specialist will be with you momentarily.
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Oh for tougher to kind of help you.
Hi, I am looking to I'm, sorry, one second.
I have the written down the reliance steel and aluminum earnings call.
Okay I need your.
Okay.
Personally Michael last name Bitch VI CH.
And the name of the company Sir.
Era installed A.I.E.R.A. J.
Okay.
That's right again, thanks for calling.
Thank you.
We recently increased our 2019 capital expenditure budget to $260 million.
Our prior budget of $245 million to help support our growth activities better meet our customers' needs improve the safety of our operations and enhance the working environment for our employees. These capital investments include the addition of new.
Innovative equipment and advanced technology, as well as facility upgrades and expansions.
As a part of our growth initiatives, we continue to identify new opportunities to expand our value added processing capabilities to promote margin expansion and drive greater earnings power.
We're also seeing significant number of acquisition opportunities in the market, though we remain selective and disciplined we continue to look for targets to meet our strict criteria of high quality business with experienced management teams and superior levels of customer service.
Acquisitions must also complement our product and end market diversification strategy and be immediately accretive to our earnings.
Through our capital return activities, we've continued to pay our regularly quarterly dividend as we have done now for 16 consecutive years.
Before I conclude conclude I'd like to highlight a few recent changes we've made to our board of directors this past month.
On October Threerd, we welcomed Lisa Baldwin as a new independent director Lisa brings a wealth of knowledge and experience in information technology, having served as chief information officer at Tiffany and companies since 2013.
We believe leases nearly 25 years of extensive experience will benefit reliance as we continue to implement innovative technologies that empower our business.
Additionally, falling Gregg Mollins retirement, as Chief Executive Officer of reliance at the ended the year, Greg officially step down from the board of directors earlier this week.
As part of a deliberate long term subsection plan I was appointed to the board concurrent with Gregs retirement on behalf of the entire team here at realize I'd like to acknowledge and thank Greg for more than 25 years of service on the board and for his dedication to reliance.
In summary, we are proud of our third quarter results, which adjust our strong strategy of focusing on high quality high margin business and our longstanding commitment to being responsible and efficient stewards of capital.
During a period of declining metal prices that were steeper than we anticipated our proven business strategy helped us generate a strong gross profit margin, which translated to growth in our earnings per share despite our sales being down year over year.
That's available.
Once again, thank our managers in the field further excellent execution.
Yeah.
Hello.
Looking ahead, we will.
Named.
And our focus on maximizing earnings and delivering long term shareholder value.
Thank you for your attention today ill now turn the call over to Carla to review, our third quarter financial results and fourth quarter 2019 outlook in more detail.
Thanks, Jim and good morning, everyone.
Net sales in the third quarter 2019 decreased 6.9% from the second quarter of 2019, mainly due to lower shipments from normal seasonality trends along with continued downward pricing pressure our tons sold decreased 2% compared to the second quarter.
2019, which was better than our expectation of down 4% to 6% primarily due to stronger demand in nonresidential construction.
Our average selling price per tons sold was down 5.1% compared to the second quarter 2019 outside of our expected range of down 1.5% to 2.5% due to overall weaker pricing fundamentals for many of the products, we sell in particular certain carbon steel.
Product is price is dependent upon scrap costs.
As Jim highlighted our gross profit margin for the third quarter of 2019 was 30.3% above our estimated sustainable range of 27% to 29% and this is a direct result of the outstanding performance.
Managers in the field, who continue to maintain pricing discipline by focusing on higher margin orders and providing more value to our customers through our ongoing investments and value added processing equipment.
In addition, our use of the LIFO inventory valuation method reduces the volatility of our gross profit margin and earnings resulting from fluctuating metal cost.
Since the oil prices decrease more than we expected in the third quarter 2019, we have increased our estimated full year LIFO income to $100 million from our previous estimate of $70 million. As a result, we recorded LIFO income of $40 million or.
44 cents of earnings per diluted share and the third quarter 2019, compared to LIFO income of $22.5 million are 25 cents of earnings per share in the second quarter 2019, and given our current estimate of $100 million of annual LIFO income.
In 2019, we expect to record $25 million of LIFO income in the fourth quarter 2019.
If you recall, we recorded LIFO expense of $271.8 million in the full year 2018, when metal prices were rising.
This increased our LIFO reserve to $293.6 million as of December 31, 2018.
As we explained at the time this reserve will decrease as metal prices decline, which has been the case. So far in 2019. This has created LIFO income that has increased our gross profit margin and earnings in each of the first three quarters of 2019.
With our current estimate of $100 million of LIFO income in 2019, our LIFO reserve at year end is expected to be $193.6 million, which will remain available to support our gross profit margin in earnings and earnings in 2020 and beyond.
And if metal prices continue to decrease from 2019 year at levels.
Our third quarter SGN expenses of $518.7 million declined $12.7 million from the second quarter of 2019, with our headcount decreasing by 2.8% on a 2% reduction in tons sold.
Employee related costs represent approximately 60% to 65% of our SGN expenses and this head count reduction reflects our continued focus on expense control and our ability to respond quickly to market conditions.
Our effective income tax rate for the third quarter was 25% up from 22.9% in the third quarter 2018, we expect our effect effective tax rate for the full year of 2019 to be approximately 25%.
Up from our full year 2018 tax rate of 24.5%, primarily due to increased state income taxes.
Net income attributable to reliance for the third quarter of 2019 was $162.7 million or $2.40 per diluted share compared to $148.3 million or $2.03 in the third quarter two.
2018, which included a 36.8 million dollar impairment and restructuring charge.
Our non-GAAP earnings per diluted share or $2.39 in the third quarter of 2019 compared to $2 and for a two cents in the third quarter of 2018.
A reconciliation of our non-GAAP earnings per share can be found in our earnings release issued earlier today.
Also please note that our guidance range for non-GAAP earnings per share of $1.90 cents to $2 and the third quarter of 2019 assumed LIFO income would contribute 19 cents per share.
This would have resulted in $2 of 15 cents of earnings per diluted share well above the top end of our guidance range.
The increase of our annual LIFO income estimate to $100 million resulted in an additional 25 cents of earnings per share, bringing our reported earnings per share to $2.40.
Our third quarter 2019 earnings per share also benefited by 18 cents per share compared to the third quarter 2018, due to fewer shares outstanding as a result of our record share repurchases in 2018.
And turning to our balance sheet and cash flow, we generated strong cash flow from operations of $490.9 million during the third quarter of 2019 and $954.1 million for the first nine months of 2019 with a focused reduction.
Of inventory levels.
We invested $58.9 million and capital expenditures and paid regular cash dividend of $36.8 million to our stockholders in the third quarter of 2019.
In addition, we paid down $367.5 million of our outstanding debt during the quarter.
At September Thirtyth 2019, we had $1.65 billion of total outstanding debt and $1.05 billion available on our $1.5 billion credit facility, resulting in a net debt to total capital ratio of 22.6%.
And we are very well positioned to continue executing on all of our capital allocation strategies going forward.
Turning to our outlook, we remain optimistic about business conditions in the fourth quarter of 2019, we expect that end demand will remain relatively steady excluding the impact of normal seasonal patterns, which generally includes a decline in shipping volume due to customer holiday de risk.
Slated closures and fewer shipping days compared to the third quarter.
As a result, we estimate our tons sold in the fourth quarter of 2019 will be down 4% to 7% compared to the third quarter of 2019.
We also expect that overall metals pricing will remain near current levels, which we estimate to result in our average selling price in the fourth quarter of 2019 declining 2% to 3% compared to the third quarter of 2019.
Accordingly, we currently expect non-GAAP earnings per diluted share to be in the range of $1.60 cents to $1.70 cents for the fourth quarter of 2019.
In closing we are very pleased with our third quarter 2019 financial results, which exceeded our expectations.
Excellent execution of our strategic focus on high levels of cuffs customer service across diverse products and end markets by all of our employees in the reliance family of companies resulted in yet another quarter of strong earnings and significant cash flow supporting our growth and stockholder.
Return priorities.
That concludes our prepared remarks, thank you for your attention and at this time, we would like to open the call up to questions operator.
Thank you we will now be conducting a question and answer session. If you'd like to ask your question you May Press star one on your telephone keypad, a confirmation tunnel endotek indicate that your line is in the question Q.
You May press Star too if you would like to remove your question from the Q.
For participants using speaker equipment, and maybe necessary to pick up your handset before pressing the star Chief.
Our first question comes from the line of Martin Angler with Jefferies. Please proceed with your question.
Hi, good morning, everyone.
Morning.
So the better than expected volumes were encouraging on the quarter based on what you're seeing today with activity also speaking with your customers regarding their outlooks would you expect the by the time, we get into early 2020, we're going to start to see positive volume growth year on year.
Yes Marlins, Jim what we certainly hope so our look again, we have our customer base or they are mirror, they're doing just fine we had a better than expected.
Third quarter in the fourth quarter as you can say in our guidance reflects the seasonal.
Traditional kind a downturn, but we also have some tailwind.
Non res construction was nice.
But it will surprise and not really the reason we knew some good things going on out there and we anticipate good things to continue in the fourth quarter. So by the time next year Hes. This kind of interesting how things work out usually the first quarter and the second quarter. Our reliance is strongest quarters. So I anticipate that happening again in 2000.
One.
Great. Thanks to the detail there and also one thing stuck out on the volume categories. There on the other volume category, that's kind of implied outside of the categorize volume stepped up I believe notably quarter on quarter could you talk about maybe what's in that mix, what was driving that and kind of how you would expect that to.
Trend moving forward.
And quarter on quarter are you talking Q2 to Q3 at 19 or Q3 18 to Q3 19.
The sequential of 19 correct two to three.
Yes, so in that category a lot of what's in there.
Our fabricated products, so to speak and some of our higher end value add also in their big component our scrap sales.
Then when reliance produces scrap we also are able to have that recycled. So all of those scrap sales go into the category that really you know strength within our fabricated products continued to grow that some of the smaller acquisitions, we completed over the last year to has grown that not miss.
Surely Q2 to Q3.
But that has been growing our other sales also in there we have you know.
Ross copper.
Miscellaneous other products, our perforated metal products, we consider fab.
So just kind of a next.
Everything other.
Then what we have in there, but I think our focus on the value add at a higher levels of value added processing are the main drivers in there. Okay. Thanks for the detail there if I could one last quick one.
What would prompt you to increase your sustainable I feel gross margin range I mean, we've seen pretty solid results running here for a while maybe one could we expect that are what I guess indicators are you looking up before you would revise that higher.
One of these days I'm going to wake up from Joe like we should do that right now.
This is it took it took us a wall to wall.
To kind of.
I feel that trend as more than just a trend that something within its sustainable. So we're we're looking at the we're looking at that we're going to continue to drive our ROE model of a more and more and more.
Value added and also in our or customer keep asking us do more and more so those things continue to do so.
I'm going to Barranquilla, you will be a first wants to know.
We anticipated that comment.
The play by someone.
On the call today, and you know I think we've said over a longer term based on what we're seeing like Jim said, we expect team continued to grow the value add we're doing with that we expect to incrementally raise that range, but.
We're not ready to do so today.
Okay excellent thanks for the color there and very impressive results congratulations.
Thank you very much.
Our next question comes from the line of Matthew Korn with Goldman Sachs. Please proceed with your question.
Hi, This is highly from Goldman Sachs on for Matthew Korn Arms quick one from me shipments came in much better than you've all expected and I know you discussed it a little bit in your prepared remarks, but could you. Please elaborate a little bit more on what end markets. The price you most and is there anything specific in the market, but you're seeing that is driving that.
Well, we mentioned Nonres construction, we knew there was a little tailwind if you remember back in the second quarter or some weather concerns cross the North America, and we are assuming let's just call pent up demands orders that were on the books are and where we're able to give to enable ship through some stay.
Kind of stuck in the and swollen rivers and what have you. So we knew there was going to be a little bit of that so I think thats, what we saw and I'm not.
I wouldn't be surprised that doesn't continue the fourth quarter, but those that those are the ones that we would.
It's really point to of course, our automotive that continues to be strong even though the GM strike I think still continues.
We're trying to ratify here soon.
That affected us towards the end of the quarter more than does in the first of the quarter, but so now you have.
Some pent up demand there too so low level CLL plays out but non rose.
Was a bit of a surprise, but not not a huge surprise and I think to that point to Jim's point that.
Nonres listen as much of a surprise because it a bit about what's the timing so our in our Q2 tons. While they were strong and they were good I think you know we're not quite as strong as we've seen some prior year. So the decline coming into Q3 wasn't as much and don't forget about aerospace that's that's a good win for us that's.
That's a given remains good backlogs are nice.
[noise] the prices are going up which they all should be going up in my opinion, but those are going up in holding so that's that's a good market for us as well.
Got it. Thank you guys. That's very helpful. And then regarding the nonresidential I mean is there any particular region or any particular project, but you're saying that that's driving not shrink.
Oh, it's it's a kind of all over all of them up strong strong west North northeast has been going well for a long period of time so south.
Southeast going quite well as far as the projects themselves kind of usual suspects no. We're not the ones we get the big 40 50.
Store story, a high rise that goes more direct mill.
Our sweet spots kind of institutional type.
Businesses, if you will.
Dormitories universities, what have you assisted living facilities.
Which helps demographics will continue to drive that number up so those kinds of the big Big campus type.
Projects that were has been around over the last couple of years Theres still some of those there were involved in.
And.
But it's kind of across amount, but again it really we're we're our sweet spot is our sweet spot.
Happens to be good right now and has been good for last couple of years.
Great. Thank you that's all for me and congratulations on the strong quarter.
Thanks centers.
As a reminder, ladies and gentlemen, it is star one to ask a question. Our next question comes from the line of Phil Gibbs with Keybanc capital markets. Please proceed with your question.
Good morning.
No.
I know restructuring and cutting costs are always hard.
Yeah, I think Carl you mentioned that there were some of that.
In in the third quarter.
Where was that specifically targeted out in terms of.
In the end markets of the business.
Well you know our company, we run our company in a day to day week to week month to month, and when we see weakness and we we think that the weakness is going to continue we just do the right. Thanks, we look at our headcount we look at our expenses and.
If we think it's going to be continued to be we will we call. It right sizing it whether it's in head count or inventory control or whatever it's the same thing we've been doing for for a long period of time works, we're very disciplined when it comes to that.
Yes, we could go through every market. The energy has been tough and we think will remain a little talk us where there was there was some cuts there.
Strong, but where we have strong business, we probably added.
We're always continuing to invest in innovation and.
So I T type things those are those may be going up little bit, but it's just it's just kind of.
Company by company market by market and.
I can't tell you exactly where they all are but.
What we're well continue to look at that we always do that it when all those even when business is good we look for ways to be more efficient and provide better value for our investors. So yeah. It wasn't a new direct is and the third quarter fill that certainly were in locations, sometimes geographic sometimes its end market.
We just try to keep our expenses in line with our shipment volumes and our our profitability levels, but just because we didn't call out any reduction in Q2, where Q1 you know it at each of our individual businesses as Jim said kind of day to day week to week. There Rightsizing. So there has been.
It was head count and hiring activity in all quarters. It was just a little more significant this quarterly commented on it.
Okay.
Thank you for that and then.
In terms of the Capex budget for this year I think last comment was maybe to 45 that looks like it's going to be the case again based on your trends to date should we expect another strong growth Capex budget in 2020, just given the continued migration to the business in the capabilities.
Yeah, you know we have a good thing going fill we've got on good model. It works, we're going to continue and invest where we think so right place investors. The new technology is out there as expenses and we've got the money to do it we.
We'll continue to listen our customers, our customer's going to continue to ask us do more and more and the the.
Innovative.
And Thats available, it's really really great stuff. So we'll continue to two.
Invest there, yes, there's always some yes, we got figure there is always $90 million to $100 million year on just what we call maintenance.
It's really not just maintaining what we have the even maintaining the equipment. We have it's all our quality equipment that we correct.
Raise our margins because we have tighter tolerances on so let me that money as we were accompanied likes to own the businesses. We operate out of woken will continue to buy.
The two buildings that we don't own sometimes when you do an acquisition.
And we like to hold onto some real estate for a period of time and once it becomes a comes clearly we jump in and invest and that my guess is so as our business continues to grow in our model continues to do well that.
I will expand.
And have a lot internal.
Growth, which is my favorite gonna grow so we can control.
And yes, so it's a well my guess is what continues but maybe not none of that to 45 to 60 level.
But we'll see Wilson and just to clarify fill in Jim commented in his script. He mentioned that we just increase the 2019 batshit come to 45 to 260 and that was you know just really some maintenance in growth opportunities that came up during the year, we typically build.
Our capex budget once a year, where in the process of doing that right now so when we talk to you guys again in February we'll be able to give you a better number on what our 2020 budget will be appreciate that I think I missed it.
And then specifically to the semiconductor market I know it's been weak.
Very high margin business for you so.
Interestingly, you're putting up very good numbers with or without without a tailwind there.
Any thoughts on on that market right now on isn't one it stabilizes.
Yes, Hey, Bill, It's Bill Hey, Bob.
As we said semiconductor still remains saw we're looking for some kind of rebound as we get into next year seems like we slide the window, what little bit we were thinking maybe Q1 next year, we probably push that out maybe till mid year next year, where we start to see some rebound in that business, but we know what will.
Come back and so.
While it's not doing as well as it had been doing is still doing pretty well for us and we look for him to that recovery time frame and we'll be well positioned for that so I'll just add on that I think that and you know this speaks to the strength of our model. We can have a whole industry. This that's down or slower or slowing and then.
And and continue to grow.
Well you in our stock and that certainly is one that's been done for couple of quarters known energy has been down little bit, but we we have lot other markets and a lot of other products that are on doing quite well.
Thanks, just it's interesting to note that your your gross margins were were solid and stable and expanded a little bit on a LIFO basis, and grangers and Fastenals fell so interesting [laughter], that's pretty good Mojo and.
[laughter] mode Joe's modules horizon.
[laughter].
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Our next question comes from the line of Seth Rosenfeld with Exane. Please proceed with your question.
Hi, Thanks for taking the questions I'm I've a couple of thoughts on.
Well first on construction the moving over to just broader industry inventory levels with regards to construction I think you've referenced in the past winds, having pretty significant excess capacity in construction distribution and processing.
Demand.
Upside could we see from your construction shipments with existing capacity before further investment I'd be needed. A is there any impact we should expect from that the fixed cost leverage historically laggard assets.
I'll start there please.
Yeah.
Hey, Seth and I apologize is kind of hard to hear that beginning part of your question, but I think you are asking about our ability to leverage our fixed cost structure in our existing nonres business that we've talked about before and you know even with a shipment volumes being up a bit we still have a pretty substantial amount.
Additional capacity, where we could run volumes through we've talked in prior quarters about the fact that over the last you know probably eight eight ishares now we've been continuing to invest in additional value out of processing equipment in those businesses. So we're doing well in those businesses are.
On the volumes that are going through but we're probably in most of those nonres businesses are probably still down volume wise.
On average for the year, 20%.
So we still have a pretty decent amount of additional volume that we can leverage our current fixed cost structure.
That's great. Thank you.
And then fortunately for the industry at large we've obviously seen a very aggressive your be stocking appears across service centers at its could you be trade working capital release, a in Q3 as well looking across the marketplace do you shouldn't your competitor sitting on it simply unsustainably low inventories that need be replenished oh or are we in India.
Sustainable level.
If it's the former are you gaining share from these peers, who is aggressively cut parts to aggressively cut their inventories.
And then lastly, any comment on working capital expectations into yearend. Thank you.
I'll handle the first part of as far as our competitor, we don't spend a whole lot of time worried about what our competitors do we worry about what our customers are doing.
We worry about what our suppliers are going.
As far as de stocking of inventory of number like that term because we we don't do that.
What we do is order inventory in anticipation of what our customers are going to Bob We continue to do that I don't know what does come over competitors by offshore that's their thing and this not ours, we've always been a domestic supporter 95, so the carbon we buy as domestic for reasons not that we don't logos.
Because we do the greater what they do.
And we care about that the the North American.
Manufacturing markets, but.
We're we understand cash is king and when you're when you're buying domestically that helps with your inventory turns and that's something we're going to continue to do so destocking restocking launch discount.
We do what we do and and I will will continue to do that in our inventories in fine shape, and I don't know, but anybody else's immature.
Yeah. I think said you know is as I commented on we did have a focus on inventory reductions that we've talked about that we've had that for the year. We felt we probably like a lot of other companies by the little heavy in 2018, there was a little on I think confusion so to speak in the market with how much was pre.
The buying by by some that old customers in the second quarter 2018. So weve you know how to focus on reducing inventory levels. Throughout this year, we've been making progress we had and some good improvement during the third quarter, we generated about 100 $857 million it.
Cash flow from operations just from inventory reduction during Q3 from from June Thirtyth, a part of that a little bit of that is lower pricing, obviously throws off of dollars, but we also had a a focus on reducing our levels to be in white, where Jim talked about you know kind of rightsizing the old.
Centuri, a we're not at our inventory turn call yet for the year, but we're getting pretty close and.
So we think we're in good shape, which feeds into your question on working capital levels from now to the remainder of the year.
So with lower shipment volumes typically we release working capital and the fourth quarter. So we would expect to generate you know a little more cash from operations a it's been very strong in the first three quarters already this year, so with our continued expectation of maintaining.
Gross profit margin levels, which throws off a good profit levels for us to generate cash along with just the shipment volumes and reducing our working capital levels. We do expect that you know good cash flow again in the fourth quarter.
Okay. Thank you very much.
Our next question is a follow up question from the line of.
Martin Angler with Jefferies. Please proceed with your question.
Hi, Thanks for the time on the follow up I wanted to see if you could touch on your aluminum business volumes were a little bit lower year on year I believe and then maybe if you could also contrast that to on aluminum tolling business and what you're seeing with volume activity there.
Yes, well, hey, Martinsville sales.
Yes, the aluminum business.
Lot of al the common alloy side, we've seen that market a little softer both on on the demand and on the pricing front.
And in contrast on the heat treat side that business has stayed.
Relatively strong.
The aluminum we continued to grow on the toll processing side for aluminum as yes aluminum content in automotive continues to increase and our investments that we've made on the toll processing side along that has been focused on the aluminum saw so we see continued increase there from a toll.
Processing standpoint.
Okay and as a quick follow up to that can you kind of speak to the margins on aluminum toll processing versus carbon toll processing and then also how you see availability on the heat treated aluminum plate side of things, both arrow and general engineering.
Yeah first of all we don't comment on the margins, so well I'll skip that question and.
On the heat treat side.
For aluminum plate, we still see that market fairly strong lead times at the mills are still extended.
Theres still a little bit of tightness on supply side.
So that that business. We think we'll continue to stay strong looks like the the outlook for 2020 continues to be very positive.
Do you think that you take a step up and heat treat aluminum volumes in 2020 or it just remains at an elevated level like what we're seeing today.
Yes, we think our outlook is we think the strength.
The demand picture that we're seeing now we will continue in 2020.
Okay excellent thankful for all the thanks for the incremental detail there.
Okay.
There are no further questions in the queue I'd like to end the call back to Jim Hoffman for closing remarks.
Thanks, very much we'd like to thank everyone on the call today for your continued support and commitment to relaunch. We'd also like to thank those of you attended our analyst and Investor Day back in September for those of you are unable to join US and archive video.
Webcast and a corresponding presentation can be found on the investor section of our website at Www Dot R.S.A.C. dotcom.
Lastly, I'd like to remember to remind you all the will be in New York City next month, presenting at the Goldman Sachs Global metals and mining conference and also at the cones chemical metals and mining some.
We hope to see some you there.
Hope you enjoy the rest of your day.
Ladies and gentlemen, this does conclude todays teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.